Restructuring

The Delaware Bankruptcy Court’s decision in J & K Adrian Bakery, LLC v. Dayton Superior Corp. (In re Dayton Superior Corp.), No. 09-11351 (BLS), Adv. No. 12-50950 (Bankr. D. Del. Jan. 15, 2013), illustrates the boundaries of the debtor’s power to limit damage claims by rejecting a lease.  
In December 2001, the debtor-tenant entered into a twenty-year commercial lease for property located in Pinson, Alabama.  On April 19, 2009, the debtor filed for chapter 11 in Delaware.  The bankruptcy court confirmed the debtor’s plan, which rejected the lease, and the plan became effective in October 2009.  The landlord timely filed a proof of claim for rejection damages; the debtor objected and the parties eventually stipulated to rejection damages in a reduced amount.  For reasons not clear from the opinion, however, the debtor continued to occupy the leased premises and continued to pay rent until January 2011.  The landlord then sued the debtor in federal district court in Alabama alleging state law claims against the debtor for damage to the leased premises on account of the debtor’s conduct between December 2010 and January 2011 while the debtor was moving out of the premises. 
The debtor moved to dismiss the Alabama lawsuit, contending that the claims were barred by the confirmation order, which required all lease rejection claims to be filed within 30 days of the rejection date for the lease.  The parties disputed when the “Rejection Date” had occurred under the confirmed plan of reorganization, and thus whether the claims asserted in the Alabama lawsuit were time barred by the confirmation order.  The Alabama court found the confirmation order ambiguous, declined to decide this question, and instead transferred the matter to bankruptcy court in Delaware.
The bankruptcy court rejected the debtor’s arguments, finding for three reasons that the landlord’s claims were not barred.  First, the bankruptcy court determined that the claims asserted in the Alabama lawsuit were post-confirmation claims not barred by the confirmation order.  Because the damages alleged by the landlord pertained solely to post-confirmation activities, which occurred well after the confirmation order and the parties’ stipulation regarding rejection damages, the dispute was not “related to the Confirmation Order or the bankruptcy case.”  Second, the bankruptcy court rejected the debtor’s contention that the doctrine of res judicata foreclosed the landlord from challenging the confirmation order, following Third Circuit precedent and holding that claims for post-confirmation acts are not barred by the res judicata effect of a confirmation order.  Finally, the bankruptcy court applied the principles of res judicata to hold that the prior resolution of lease rejection claim, by stipulation, established that the lease had been rejected in 2009—long before the damages alleged in the Alabama lawsuit.  Because the stipulation fully and finally resolved the landlord’s rejection damages claims, the post-confirmation damage claims were a new cause of action not barred by the confirmation order.  Finding that the landlord’s damage claims were not barred by the confirmation order, the bankruptcy court transferred the case back to the Alabama district court for adjudication.
While its facts are unusual, the Dayton Superior case illustrates the limits of a debtor’s power to cap rejection damages claims.  In situations where a debtor continues to occupy leased premises after the effective date of a lease rejection, it may be exposed to claims for damages to the premises.